Anti-avoidance versus trade stimulation.
Is government biting the hand that feeds? Has the hand that feeds been cut off…? It would seem so when reading the headlines on current tax news and amendments.
Tax policy has an opportunity to be instrumental in supporting economic and fiscal objectives that South Africa needs to achieve. However, the lack of transparency of National Treasury and recently proposed amendments to tax policy contradict these imperatives.
Our government seems set on increasing revenues – regardless of the economic situation we currently find ourselves in business, as a nation and from an international point of view.
What is Treasury’s objective? Is the objective to support and enhance business, churn the economy and stimulate trade between countries? Proposed amendments to the Income Tax Act are riddled with anti-avoidance. Carbon tax has been packaged to ‘change behaviour’ and corporates have been assured that the money will be invested back into the system to support a ‘greener economy’. We find ourselves asking if these new amendments are not just a way for Treasury to increase revenues?
At the recent 39th G8 summit, which took place in Northern Ireland, UK Prime Minister David Cameron led key discussions on tax avoidance and evasion. While leaders agree that evasion and transparency need to be addressed, tax avoidance remains a complex and grey area.
The reason for this complexity is twofold as every country has its own general and specific anti-avoidance rules; and countries are competing for revenue in a world struggling with economic turmoil. Formal plans to increase transparency and address profit shifting by multinational businesses were discussed at the G20 conference this last September.
The private sector and individuals that contribute the largest amount of revenue to the countries’ reasons for avoiding tax have changed from trying to achieve a competitive edge to a mere survival strategy. Would it not be great to see a comparative analysis from National Treasury of the increased revenue and growth opportunity to the country from more taxes, specific anti-avoidance amendments and provisions in tax law versus the revenue received, the stimulation in foreign investment and growth by amending tax policy that leverages various economic drivers?
This is a key moment for countries, especially South Africa, to disclose their objectives from a tax policy perspective that will stimulate trade and foreign investment, versus trying to combat avoidance.
In May 2013 the National Treasury released an updated carbon tax policy paper. The underlying rationale for reducing the emission of greenhouse gases is to “facilitate an environmentally sustainable economic development and growth path for South Africa”.
This would be achieved by pricing carbon emissions in a way that affects producer and consumer behaviour and addresses climate change. For the investor and the consumer this translates to increased costs and prices. Why has the National Treasury not fully disclosed how their rationale for a carbon tax will achieve its objectives to facilitate sustainable economic development?
On 14 June 2013, a meeting was held by representatives of the National Treasury and the SARS Commissioner with representatives of the Fiduciary Institute of Southern Africa, the Financial Planning Institute, the Law Society of South Africa, SAICA, the South African Institute of Tax Practitioners and the Society of Trust and Estate Practitioners, to discuss the taxation of trusts in the future.
It would appear that National Treasury is concerned that trusts are being used for tax avoidance purposes, and it appears that the National Treasury wishes to understand the position better. Would government’s energy not be better spent from a tax perspective understanding how we could retain foreign investment?
SARS has engaged the tax administrations of Australia, the United Kingdom and the United States to gain access to information on tax evasion through complex offshore structures. This is one of the continued efforts by SARS to flush out tax evasion and aggressive tax avoidance that undermine the fiscal sustainability of South Africa and other nations.
The only reason that we know why the Double Tax Agreement (DTA) between Mauritius and South Africa has recently been amended is because of abuse of the provisions contained in the articles of the agreement between the countries.
It is obvious from these recent headlines that a drastic change in attitude is required. We believe change needs to start at Treasury. A more holistic perspective is needed from government. So much energy and resource are spent on patching the Income Tax Act with specific anti-avoidance clauses and continuously amending these rules to a point that businesses have no choice but to try their utmost to circumvent these amendments.
Do you see the problem? For example, do you think the abuse of the DTA between Mauritius and South Africa will subside because of the recent amendments? Our answer is ‘no’!
We respect combating fraud and tax evasion and we encourage transparency, but we believe transparency and disclosure have to start with government. Imagine if commerce could receive full disclosure and transparency from government on how it plans to support local business, attract foreign investment and give security and stability through tax policy, even if emerging markets have recently lost popularity.
Would this not change the attitude of business and how we work together with the government instead of against it? For example, would it not be great if tax policy could price funding competitively, even if the ZAR currency is not in our favour?
We are aware that there are various underlying factors that need to be considered and that tax policy is merely one of them, but from a tax perspective, we believe that government must disclose if it understands that tax policy could contribute to achieve the economic objectives set for South Africa.
On 17 July, Minister Gordhan announced the members of the Tax Review Committee to assess South Africa’s tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability. The disclosure of this assessment is crucial to show individuals and businesses, local and foreign, that South Africa wants to support and take opportunity forward together.
Author: Trevor Baptiste CA(SA), HDip (Tax) and Depika Singh CA(SA), HDip (Tax), are both senior lecturers at the School of Accountancy, University of the Witwatersrand.
To complete your CPD questions for this article, please click here